Results tagged “Time Warner Cable”

November 4, 2016 11:09 AM

Why Is DoJ Siding Against Consumers in its DirecTV Complaint?

On Wednesday of this week (11/02), the Antitrust Division of the U.S. Department of Justice ("DoJ") sued AT&T arguing that its DirecTV subsidiary was the "ringleader of information sharing agreements" among rivals that "corrupted" competition among rivals to carry the Dodgers' cable TV channel. Complaint at para 2.  According to the DoJ, this is the primary reason that Dodgers' fans in L.A.--living outside of Time Warner Cable's ("TWC") service area have not been able to watch Dodgers' games since the 2013 season.

Unfortunately, the DoJ seems dangerously unaware of findings by a federal court--in an antitrust case on the exact same subject matter being litigated during the same time frame as the facts in the DoJ complaint--that the exclusive sports distribution contracts (that raise consumer rates) may well be the more obvious Sherman Act violation. When we know what DirecTV knew--as a defendant to that litigation--we can better understand why the DoJ could not be more wrong in this case.

L.A. Regional Sports Networks ("RSNs")

Until 2011, Fox Sports was the leading RSN in the L.A. area.  It had two channels, one of which distributed games of the Lakers, Kings, and the Anaheim Angels, and the other of which distributed the games of the Clippers, Dodgers, and Anaheim Ducks. 

But, as Fox's contract with the Lakers was ending in 2011, TWC swooped in and paid $3 billion for the rights to broadcast the Lakers' non-national games for the next 20 years.  As DoJ recounts in its complaint, TWC raised the prices to carry the Lakers (as a standalone channel) well above any range of what any of the other pay TV distributors considered fair value. DoJ Complaint paras. 29-39.
 
In 2013, Guggenheim Partners paid an unheard of $2.15 billion for the Los Angeles Dodgers baseball team ("Dodgers").   The private equity investors then turned around and sold the exclusive rights to distribute Dodgers' games--in the form of a dedicated "Dodgers channel"--to TWC for an even-more-unheard-of price of $8.3 billion.

Reportedly, TWC never budged on its demands, that every pay TV distributor (i.e., competitors and other cable/satellite companies), would have to pay it--on a per-subscriber basis for the rights to broadcast Dodgers games--regardless of how many of these distributor's customers want to watch the games.  Until Wednesday, the narrative was that TWC's "unmitigated disaster" of a deal showed that perhaps there was some limit to the ever skyrocketing costs of sports programming.

DoJ to TWC's Rescue

The DoJ contends that DirecTV privately told other pay TV companies that it was not going to pay TWCs outrageous demands. The DoJ argues that, but for this exchange of information, TWC's competitors, and other pay TV distributors in the L.A. Dodgers home market, would have been happy to pay (and pass along to their consumers) the supra-monopoly prices being demanded by TWC.

Bizarrely, DoJ contrasts the "anticompetitive" situation of today with an earlier--presumably "competitive"--negotiation period, in which TWC (as the new RSN for the Lakers) extorts a price from Cox Communications' subscribers of "60% more" than Cox's internal analysis indicated the content was worth. Complaint at para. 36. No, the DoJ's thinking is that if cable companies aren't just spending their customers' money and passing through rate increases, then something illegal is afoot.

The fact, though, is that the vertical distribution contracts--which are responsible for the sports programming price increases (that  DoJ is incomprehensibly fighting for)--were under antitrust scrutiny, and coming up short, throughout the relevant time period covered by the DoJ suit.  After looking at these contracts in the light of antitrust precedent, we can truly appreciate just how wrong the DoJ was to go after the victim--and not the cause--of spiraling sports programming costs.

Consumers Fight Anticompetitive RSN Contracts

In 2012, consumers filed class action antitrust lawsuits against the MLB and the NHL in the Southern District of New York. See, e.g., Laumann v. NHL, et al. and Garber v. Office of the Commissioner of Baseball, et al., 907 F. Supp.2d. 462 (SDNY 2012).  These cases squarely attacked the contracts at the heart of the exclusive "home television territory" ("HTT") distribution model.  Specifically, consumers alleged that the contracts between the teams, MLB (and the NHL), and the RSNs of DirecTV and Comcast, illegally restricted competition in the broadcasting/streaming markets because these agreements also restrict the right of the "away" team--a non-party to these contracts--to sell its own broadcast feed to anyone in the HTT area of another RSN.
 
MLB fans can only watch games of their "home team" by purchasing a cable package from the RSN (or a distributor of the RSN, such as AT&T, Verizon FiOS, or a satellite or cable company).  Fans of other teams could only watch the games of out-of-market teams by purchasing an out-of-market package ("OMP") from the leagues (for streaming customers) or from the RSN (distributing on behalf of the leagues).

The plaintiffs' successfully argued (at every pre-trial stage) that the complicated web of contracts between the teams, the leagues, and DirecTV and Comcast (which prevented a non-party to the contract (i.e., any "away team") from selling its own independently-produced feed of the game to any fan in any part of the country) were "contracts . . . in restraint of trade" in violation of the Sherman Act.  The plaintiffs' contention was that, but for these contracts, fans could purchase the away-team feeds of games on an "a la carte" basis, even if they did not want to buy home team's cable package.

The Case History/Court Findings

Throughout the case, DirecTV and Comcast (in the same role as TWC in the DoJ case), vigorously argued at every possible stage that, as the RSNs, they were merely accepting terms set forth by the Leagues and that they did not benefit from the exclusivity--and the higher-than-competitive consumer prices--that this exclusivity produced.  The court rejected this argument in both the defendant's motions to dismiss in 2012 (opinion) and their motions for summary judgment in 2014 (opinion).

The court explained that,

evidence that the Television Defendants would not have entered the contracts at the prices prescribed but for the territorial restrictions, is sufficient evidence from which a fact finder could infer a tacit horizontal agreement among the RSNs and MVPDs

See, Opinion Denying Defendant's Motions for Summary Judgment, at 50 (emphasis added). Further, in rejecting the defendant's motions for summary judgment, the court found,

The clubs in each League have entered an express agreement to limit competition between the clubs - and their broadcaster affiliates - based on geographic territories. There is also evidence of a negative impact on the output, price, and perhaps even quality of sports programming.
See, Id. at 30/57.

In May of 2015, the court certified the plaintiff's class to go forward to trial in order to seek injunctive relief, but not money damages, because there was no common monetary impact among the class members. This decision pretty much guaranteed that the case would settle, which it did, on the eve of trial, earlier this year.  The settlement agreement, unfortunately, leaves intact the geographic market exclusivity, which, in turn, ensures that sports content costs will continue to spiral.

To What End?

In many ways, this is/was the perfect case for an antitrust enforcement agency to bring--meritorious, but without the profit potential to ensure the efficacy of private enforcement. However, there is no evidence the DoJ was even aware of this antitrust litigation.

So, instead of taking up the consumer's side, the DoJ chose to sue on behalf of conduct that a United States District Court has already characterized as "express agreement[s] to limit competition between the clubs - and their broadcaster affiliates - based on geographic territories" and their corresponding "evidence of a negative impact on the output, price, and perhaps even quality of sports programming." It is sad that the DoJ didn't follow antitrust developments in this field closely enough to know that agreements which result in distributors paying 60% premiums over value is the result of a "corruption of competition"--rather than competition itself.

Finally, it is interesting to consider that, until several months ago, DirecTV had every reason to believe that a court would be likely to find that its RSN contracts were an illegal restraint of trade.  How ironic that, having dodged a bullet with respect to its RSN agreements, DirecTV would find itself the target of another lawsuit for not agreeing to pay the most anti-consumer RSN contract in America!


April 8, 2014 3:06 PM

The Comcast-Time Warner Cable Merger and TV Quality Broadband Deployment

In Comcast's public positioning of its proposed acquisition of Time Warner Cable, executives of both companies have chosen to characterize the merger more by what it's not than by what it is.  So, we know that the merger is not going to result in any significant efficiencies, because it's not going to reduce consumer prices for cable (even an unconstrained monopoly reduces prices when costs decline).

We also know that the merger is not between two competitors, because--as the companies make it a point to tell us--they don't compete.  TWC's CEO says, "[w]hether you're talking about broadband or video, we don't compete with one another."  Comcast's CFO goes as far to state, "[w]e don't compete in one single zip code."  

Doesn't it kind of seem like they're trying just a little too hard to sell the notion that the combined service territory of Comcast and TWC is not relevant (because, you know, they don't compete)?

Product Market Definition

The last time the DoJ's Antitrust Division ("Government" or "DoJ") looked at a Comcast acquisition, it determined--based on documents from Comcast--that Comcast's "joint venture" (as it was structured at the time) with NBC-Universal would reduce competition in the "video programming distribution" market. See Comp. Impact Stmt. (CES).  The Government seemed especially concerned at the ability of post-merger Comcast to destroy nascent competition from online video distributors. CES at C and D.

Based upon the Government's concerns in the previous Comcast acquisition, and DoJ's focus on cross-elasticity of demand in defining a relevant product market, let's focus on some recent information from the Leichtman Research Group to get some valuable insights into how the Government might define a relevant product market.

Consider that, among multi-channel video providers, cable companies lost 1.7 million customers in 2013.  But, AT&T and Verizon added 1.5 million MPVD subscribers last year.  The Leichtman numbers show that customers are not so much "cutting the cord" (only 105k customers stopped buying from an MPVD in 2013) as they are switching MVPDs--but customers are choosing MVPDs that are also broadband providers.  Very high percentages (according to AT&T, well over 90%) of both cable and telco MPVD subscribers are also broadband customers.  The Leichtman data confirm this for Comcast and TWC, as well.

Purchasing video service from another broadband provider, allows the customer to purchase services they want from the MPVD, but also purchase services directly from an online vendor, like Netflix.   In its earlier analysis of the significant competitive effect of online video distributors, the Government referred to this practice as "cord-shaving." CES, at C.2(b).

Given consumer behavior, it seems likely that the Government will focus on a broadband market--of a sufficient speed to facilitate a competitive MPVD service--as the primary relevant product market.  Because it is this market in which the traditional "hypothetical monopolist" test would yield the greatest supply substitution responses.  For all practical purposes, we should consider broadband providers offering service at 10-15Mbps as participants in the "MVPD-bandwidth" market.

Geographic Market Definition

If one's primary concern was to look at the area over which the post-merger firm might be able to reduce competition, then that territory would be (at least) the total number of MVPD-bandwidth broadband customers in each geographic market served by Comcast or Time Warner Cable.  Within this total subset of homes passed will also include the majority of the customers capable of being served by AT&T and Verizon.

What is difficult to figure out from publicly available data is what percentage of MVPD-bandwidth homes will be served within that area by Comcast, Time Warner Cable, AT&T, and Verizon.  For our purposes, just to get a ballpark idea of the type of numbers we would be looking at, we are going to use a datapoint from the Leichtman 1Q 2014 Research Notes that the number of FiOS and U-Verse addressable homes stands at 41 million, giving the companies a video market penetration rate of 26%.  

Let's further assume--and this is a generous assumption toward Comcast--that AT&T and Verizon compete with Comcast and TWC in 70% of their combined service territory, but that all of AT&T and Verizon's customers were won in this territory.  This would give us a total denominator of about 59 million homes passed (that could receive MVPD quality broadband).

Market Shares

To get useful MPVD-broadband numbers, we are going to work with the Leichtman numbers we used earlier, but, because it is impossible to tell from the telco broadband numbers how many AT&T and Verizon broadband customers are actually U-verse and FiOS customers, we are going to use MPVD customers as a proxy, in order to allow us to get some ballpark market share numbers.

merger table_smaller.pngSo, we can see that the result of this merger, for anyone that has to depend on getting content, carriage, or online video distribution to these 60 million households will be looking at a market that goes from "moderately concentrated" to "highly concentrated" under the DoJ Horizontal Merger Guidelines at Section 5.3.

Competitive Effects

The competitive effects on both MPVD rivals like AT&T, RCN, and Verizon, as well as online video distributors like Netflix, are likely to be significant in terms of their ability to get competitive programming.  Add to this the fact that Comcast will also control 12 major regional sports networks, and it is easy to see how the post-merger firm could restrict output of the most inelastic, and  "linear," of linear programming to broadband and online video competitors.

Comcast RSN Map w caption.pngThis last effect is, potentially, disastrous for the future deployment of more MVPD-bandwidth broadband in the area that would be served by the combined Comcast-TWC, because it eliminates what is potentially the biggest source of pent-up consumer demand for MVPD-quality broadband as a substitute for traditional MVPD bundled service--online access to regional sports programming.  

How do we know the significance of real-time sports programming to the value of the broadband Internet?  Because the first truly linear, all HD, over-the-top channel--the WWE Network--has attracted almost 700,000 customers paying $10/month, in only 6 weeks

If the DoJ and the FCC value the availability of MVPD-bandwidth broadband throughout the Comcast-TWC territory, then Comcast might have a reason to worry.  But, commenters on the political left and right have conceded Comcast's powerful influence over the government; so, Comcast probably does have a decent chance of moving forward with this acquisition.  Unfortunately, it just postpones the day when consumers can choose to buy only the video content they want from the vendors they want.



April 29, 2009 4:41 PM

Should Free Press Get a Free Pass? Or Do Demands for Rules Demand Reasons for Rules?

Last week, a DC-based, self-described, "public interest" lobbying group--the Free Press-sent a letter to the Chairmen and Ranking Members of the House Energy and Commerce Committee and the Subcommittee on Communications, Technology, and the Internet.   The gist of the letter was to complain that some announced broadband Internet pricing trials by, primarily, Time Warner Cable ("TWC") and AT&T are anti-consumer, and should be investigated by Congress.  The Free Press letter criticizes pricing trials that impose higher charges on relatively high-usage customers than on relatively low-usage customers.

Before I comment, I have to make some disclosures.  First, AT&T is a consulting client of mine, so readers should evaluate these comments entirely on their merits and not on the basis of any other authority a reader might assign to my comments [recommended advice for all posts, anyway].  Second, I genuinely have a lot of respect for the mission that Free Press is trying to advance.  They work really hard (for little pay) to promote what they consider to be in the best interests of the public, and they are phenomenally successful at getting attention for their causes.  So, I really don't want to bash them as an organization [though I admit the quote marks around "public interest" were a little mean]. 

Nonetheless, given Free Press's success at garnering the limited attention of public officials, they should not get a "free pass" on logically inconsistent, fact-free, and shoddily-reasoned rhetoric.  This is especially true when the purpose of that rhetoric is to consume public resources to impose costs on private parties, and, on the basis of this "faith-based" reasoning, potentially inhibit broadband penetration to the many, in favor of the broadband usage habits of the few.  The Free Press must explain their position in cogent terms, not just that they don't think it's fair for people who want to use more shared resources to have to pay more. 

What big consumer wouldn't?  With a family of six, I hate paying for six seats on an airplane when I take my family on a vacation that requires air travel.  I would much rather just pay for "air transport", and let some business pick up the additional costs associated with my family (but I doubt there really are any additional costs--together, even with luggage, we probably come in at less than 1,000 pounds--which is nothing compared to the weight of the whole airplane).  Nonetheless, this is a complaint, not a policy argument. 


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